Digital Platforms Shouldn’t Be Regulated as Utility Networks

As the five tech superpowers have grown to dominate the world, regulators have sharpened their focus on how to tame them and keep the sectors competitive.

At more than $1.4 trillion in revenue last year, Amazon, Apple, Facebook, Google and Microsoft collectively saw their profits rise 55% in 2021.

That same year, The Digital Market Act (DMA) cleared the European Parliament. The measure, initiated in the European Union (EU), was drafted to create a level playing field in the digital economy. Now, the provisions of the legislation will be negotiated with the 27-state member states before final enactment.

Panos Constantinides, professor of digital innovation at the University of Manchester’s Alliance Business School, compares utility networks — such as electricity, gas and water — with digital platforms. In this view, natural monopolies were subject to specific regulations given its specific characteristics, but these are not shared by digital platforms.

“Traditional utility infrastructures were once developed, owned, and operated by a single company, and very often that was done with the support of the state,” Constantinides told PYMNTS. “Why? Because these infrastructures had high fixed costs. Running an energy grid requires extensive infrastructure investments, and maintenance is also very costly.”

As a result, Constantinides said the costs were barriers to entry for other companies and there were no incentives to allow competitors in to provide those utilities. Doing something other than allowing a monopoly, would cause local governments to incur additional costs, the report found.

While some have argued that digital platforms are becoming natural monopolies and should be regulated like utilities, Constantinides said that idea won’t work.

“That’s problematic because digital platforms have very distinct characteristics that differentiate them from utility infrastructures,” he said.

An energy grid provides energy, it doesn’t have the capability to provide something else, he said. But digital platforms are not tied to any single product; they can do multiple products at a time.

For example, he said Amazon’s Alexa, the cloud-based voice service, can offer voice activated streaming from Amazon music, but also from Spotify, connect to Netflix, download Kindle audio books, connect to smart home applications, order an Uber, and more.

“So, if we were to treat Amazon Alexa as a natural monopoly, where would we begin to break it up?” he said. “Where do you start? You don’t know where to start because it’s diffused across so many different sectors.”

Gatekeeper Approach

For now, Constantinides said he favors the DMA, which establishes a set of criteria for qualifying a large online platform as a so-called “gatekeeper.” This allows the DMA to focus on the problem of large, systemic online platforms.

These principles will be met if a company has a strong economic impact in multiple EU countries; has a strong intermediation position, meaning that it links a large number of users to a large number of businesses; and has or will have an entrenched and durable position in the market.

“The DMA is a step in the right direction,” he said. “But I think we need to be more careful and not to treat this idea of defining a gatekeeper on the basis of size and revenue as the end all for regulating platforms. We need to understand the individual business models, the technology architectures and the governance rules that each platform before we can define the regulation.”

One example he cites is Google’s Android Open Source Project (AOSP). The initiative was crafted to guide development of the Android mobile platform including an operating system, middleware and integral mobile applications.

“It was a brilliant strategy and there’s evidence to show that this was a deliberate,” Constantinides said.

As the new entrant in the market, Google invited open-source software developers to compete to build a top operating system, establish Google Play, a proprietary set of APIs that essentially bundled their different products. They compelled the OEMs that participated on Android to have them installed.

Google maps, Gmail, Google Search, YouTube were not available separately. Users had to have all of them.

“Google did that because they essentially added a middle layer in the operating system’s architecture where they could aggregate data from all the apps,” he said.  “They could get information and knowledge intelligence about all the apps, what all the third parties were doing, and run their advertising.”